Organized Uncertainty: Designing a World of Risk Management

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Having been carved out as a series of technical practices, since the mids risk management has come to assume a more generic form. This discussion leads directly to the next theme which describes a shift in the conception of risk management, a shift from a discipline with its foundations in analysis and calculation, to a more general governing framework both for risk analysis and for management in general. Finally, the fourth theme emphasizes the catalytic role of ideas and new descriptive categories in changing conceptions of practice in general and risk management in particular. Organizations, Uncertainty, and Organized Uncertainty A number of critical developments in the Weld of risk management have taken place since However, before analysing them in detail, it is necessary to remember that the discrete practices which have come to be called risk management have a complex genealogy and have emerged from more generic relationships between organizing and uncertainty handling.

Formal organization has always existed in a fundamental, even trivial, sense to manage uncertainty. Uncertainty management, understood abstractly as lowering the costs of coordinating and monitoring, is a constitutive feature of organizations according to transactions cost theory. Relatedly, principalagent models place the analysis of uncertainty at the centre of organizational design principles. This theory has demonstrated its explanatory and analytical purchase on the world, and reXexively becomes more real as the governance of organizations is designed with these neoliberal contracting principles as blueprints Drori, Contracts, both theoretical and real, cannot embody every possible state of the future and are essentially incomplete.

So the formal contract, as a risk management technology, is itself always risky. Empirically, contracts have also come to play an important role in the management of large projects which explicitly involve risk-sharing and cooperation Froud, , and scholars of contract law have always had an intellectual purchase on the idea of risk management e.

Many approaches to understanding the relationship between organizations and uncertainty focus on the organization—environment relationship. The management of uncertainty created by these elements in environments is fundamental to the existence of an organization and is necessarily co-extensive with strategy.

While these dyadic theories of organizational exchanges with environments tend to focus on the individual organization as the strategic entity, other signiWcant strands of work focus on the organized nature of organizational environments themselves and their institutional character Davis and Powell, Thus the sharp distinction between organization and environment is blurred, placing organization theory closer to more general theories of society.

SpeciWcally what has come to be known as the new-institutionalism examines organizational environments as a resource for uncertainty management by supplying the scripts, routines, ideas and forms of management knowledge which formal organizations adopt to deal with a particularly signiWcant aspect of uncertainty, namely legitimacy Powell and Dimaggio, Based on observed tendencies for some organizations to become more similar in their formal structure, it becomes diYcult to distinguish organizations, at least in their formal character, from their institutionalized environments.

This way of thinking about organizations also emphasizes mimicry and isomorphism as modes of uncertainty management with intuitive ecological appeal; copying immediate neighbours has always been a natural survival strategy. Organizing and managing are fundamentally about individual and collective human eVorts to process uncertainty. However, uncertainty in this very general sense is an analytical construct of the organizational theorist and is not the primary interest of this book.

Uncertainties in the form of possibilities of Wnancial loss, of danger and damage which may or may not be labelled risks, do not exist sui generis but must of necessity be organized, ordered, rendered thinkable, and made amenable to processes and practice of intervention. Risk analysis is itself part of this organizational construction of risk from uncertainty. Organizations never encounter risk as a pure given; attention must be triggered, interpreted, and coordinated Hutter and Power, a. This focus on the managerial processing of uncertainty also necessitates a regard for the endogenous uncertainties which are a product of these very eVorts to manage and organize.

The theme of organized uncertainty which motivates this book therefore captures both the sense of organizations as processors of uncertainty by formal risk management and other means and the sense of organizations as producers of risk, sometimes resulting from the very eVort to seek reliability Busby, For example, it is now widely accepted that Wnancial risk models may be a source of risk and may be self-defeating when all market participants use more or less the same one.

In a crisis of liquidity they will all tend to react in the same way selling , which collectively exacerbates the crisis. In a similar way it has been argued that safety regulation may make individuals less vigilant leading to lower safety overall.

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  8. Inherent failure is a particular kind of uncertainty produced by large scale human organization, and provides a counterweight to technocratic dreams of perfect control. The paradoxical concept of the normal accident also moves the discussion from the level of general theories about organizations and environmental uncertainty to the speciWc characteristics of organizational vulnerability and response.

    Although easy to note in retrospect, many disasters exhibit this common pattern of failure to process information at appropriate levels of seniority, particularly anomalous information and gossip that does not Wt habitual channels of data processing. Thus, Wnancial scandals, such as Barings, Daiwa, and Sumitomo, have come to be understood as management and governance failures rather than failures of analysis and information Tschoegl, ; Hogan, In some cases deviant behaviour may unfold over a long period of time Beamish, Early warning signals, red Xags, gossip, and other forms of intelligence may get overridden, ignored or reinterpreted because of a desire not to take them seriously.

    Analyses of corporate scandals and failures uniformly demonstrate a tendency not to act on these early warnings Ermann and Lundman, It follows that corporate governance norms are a risk management strategy for a distinctive kind of risk—the failure of senior management to prevent risk incubation. The list of disasters which seem to Wt this analysis is long and well known: including Bhopal, Chernobyl, Piper Alpha, and many others.

    More recently, apparently surprise or random acts the terrorist attacks of September 11th ; the Turkish earthquake have been traced to historical organizational and intelligence failures fragmentation in Security and Police Services; noncompliance with construction regulations. One reason for this, to be explored in this book, is that a climate of organizational defensiveness and a logic of auditability pervade the concept and practice of risk management. Organizations adopt rationalized approaches to show that they have done everything that is reasonable because of fear of institutional sanction.

    Burgess argues that organizations are now more active in seeking out risks. Burgess suggests that an unreXective risk culture has emerged in the UK which is the very mirror image of the organizational blindness described by Turner and others. It will be argued that the form of risk management today, to be described in detail in Chapters 2, 3, 4, and 5, has been shaped by experiences and discourses of organizational failure, by the availability of institutional remedies and rationalized frameworks, and by wider rhetorics of opportunity and enterprise.

    The theme of organizations and uncertainty should not be mistaken for something very novel.

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    There is a long normative, theoretical, and explanatory history in the Welds of economics and organizational sociology in which risk management and organization are almost the same thing; managing and uncertainty are two sides of the same coin Smith and Tombs, 7. This explains some of the irritation with recent academic and practitioner enthusiasm for something called risk management as a Weld.

    Some organization scholars view this enthusiasm with suspicion since risk is something they have always, implicitly or explicitly, concerned themselves with within their respective Welds, particularly in the case of high reliability organizations. From Risk Analysis to Risk Governance The history of risk management is partly a story of the intersections between mathematical and statistical experimentation on the one hand and commercial interests on the other Bernstein, a; b.

    Shipping had always presented challenges for commercial adventurers and Lloyds of London emerged and grew by virtue of its capacity to pool exposures to hazard.


    Natural insurance principles of collectivized security were also implicit in organizational forms, such as cooperatives and mutuals. Practices remained intuitive and mathematically underdeveloped until probability theory came to be applied to practical issues of quality control in Welds such as agriculture and munitions. Modern risk management also emerged from new institutions for the collection and statistical analysis of data, such as the census.

    Subsequent institutionalization followed a standard pattern via the establishment of academic and professional associations, such as the society for risk analysis SRA. The knowledge base of risk analysis communities with strong natural hazard Wre, Xood, earthquake and health and safety interests came to be enshrined and institutionalized in textbooks.

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    4. Risk analysis scholarship and practice also Xourished in the area of technological failure and crisis management. As with all quantitative disciplines, such as accounting, abstraction and non-Weld speciWcity have been important to the rise of risk analysis Abbott, The development of risk analysis exhibits an ever-expanding frontier of formalization in which techniques are applied to new uncertainties and new risks are measured. The project of taming incalculable uncertainties as calculable risks is a dynamic one which reXects in part an evolving cultural trust in numbers as a basis for rational decision making Porter, A deeper investigation of risk analysis reveals a complex hybrid of diVerent elements Hood and Jones, a; Miller et al.

      The British Accounting Review

      Notwithstanding the manifest institutional diVerences between the Welds of Wnance and nonWnancial hazard management, risk analysis can be understood as an overlapping family of methods for the calculation and measurement of risk based in the statistical sciences. Yet the reach and coherence of these methods should not be overstated. Purely calculative, machine-like solutions to technical problems only work well in situations where there is a very high level of agreement about knowledge and a high degree of organizational and political consent about the issue Burchell et al.

      So, complex risk management problems, particularly involving matters of public policy, are mistakenly conceived as machine-like problems of risk analysis. The precise relationship between risk analysis and risk management has been much debated in the United States Silbergeld, On the one hand such a separation presumes a questionable scientiWc purity for risk analysis; on the other hand it appears to locate key elements of discretion about risk with administrators JasanoV, ; Pollack, More generally, questions of risk acceptability, degrees of precaution and the multiplicity of principles for determining acceptability e.

      Such cultural diVerences necessarily disturb illusions of scientiWcity. The emerging signiWcance of public risk perceptions has also challenged the ideal of rational risk analysis. Notwithstanding these debates about the objectivity or otherwise of risks in the light of perception variation, the broad direction of critique is the same: risk analysis cannot progress as a mathematically isolated discipline; it needs to take some account of public risk perceptions.

      Dangers and harms might be real enough, but ideas of risk and safety are complex social constructions subject to processes of framing Renn, A parallel challenge to technical risk analysis has come from debates within science studies about the authority of scientiWc expertise. JasanoV has also drawn attention to the multiplicity of narratives within which risk and the ex-post analysis of disaster are necessarily situated.

      From these points of view, formal risk analysis is part of a more general scientiWc and technical paradigm whose cultural authority is not self-evident and whose political power is often invisible. A rich stream of work on science and its publics, on regulatory science and on risk regulation has followed, which challenges the divide between informed experts and ignorant publics, which emphasizes the role of risk communication in public policy, which argues that risk objects are more complex and ambivalent than risk analysis admits, and which situates risk analysis and project management in a broader space of democratic aspirations e.

      Irwin, ; Irwin and Wynne, ; Flyvbjerg et al. In the United Kingdom the Royal Society report included material on public perceptions of risk and the risk management process, indicating a prima facie receptivity to these issues from the scientiWc community. These gestures towards the democratization of risk policy have led to a sustained focus on risk acceptance principles in risk analysis. In particular, precautionary principles of risk acceptance have been much discussed, notably in the case of GM foods Levidow, Opponents of this principle, which tends to place the burden of proof on demonstrating safety, argue for the importance of innovation, for the damaging eVect of institutionalized fear, and for the need for some kind of cost-beneWt approach to risk acceptance Starr et al.

      More generally, it is argued that debate about these principles is not the sole preserve of expert committees and individuals. Demands by pressure groups for consultation and for the elicitation of views of diverse publics has given focus groups an organizing and epistemological signiWcance in the identiWcation of risk and in the development of principles for acceptance or tolerance.

      These cumulative pressures for varied forms of openness in risk policy, for forms of participation and risk communication, have exacerbated the usual problems of decidability and actionability in risk policy.

      Michael Power (accountant)

      Attitudes to risk vary across individuals, may be diVerent at diVerent levels of an organization and may also vary across diVerent aspects of same risk and with new information Hutter, In some cases, the public may understand risk issues very clearly, in others inherent ambiguity creates a politics of uncertainty which was previously private and invisible.

      In the face of the risk of consultative exhaustion and undecidability, regulators often exhibit a preference for uni-directional forms of disclosure and transparency over dialogue. One of the most signiWcant pressures for change in the practice of risk analysis, and also a stimulus for research, has come from scandals and disasters.

      Modern states have played a role describable as risk management since the production of legislation to protect workers in the nineteenth century and the rise of the welfare state in the mid-twentieth. In the postwar period states became more self-conscious about their role in regulating risks to the public and dedicated regulatory organizations were created, employing many risk analysts and inspectors. In the UK, the handling of the BSE event had a catalytic eVect on government, creating a pressure to manage risk more explicitly with more transparency and accountability of the risk analysis and management process itself.

      As part of a general demand for greater accountability for risk handling, UK risk regulators came to be more explicit and public about their risk analysis and assessment practices e. In the UK, the drive for improved public transparency of risk assessment coupled to a need for better capacity to identify and organize risk management draws explicitly on private sector designs and norms, in just the same way as public management reforms in the s did. These risk management ideas started to become part of the oYcial self-description and self-understanding of central government activities in the late s.

      Indeed, the emphasis was more on organizational process than on democratic engagement. The performance of UK risk regulation agencies was simply one aspect of this larger public service issue. The UK case suggests how risk communication strategies, discussed in the s in terms of making risks clearer to the public, came to be strongly inXuenced by discourses of reputational or institutional risk.

      More importantly for the purposes of this book, the emphasis of communication was increasingly on the process of risk management rather than on its content. Regulation is embodied in a class of organizational actors called regulators, and these organizations are concerned in part about political perceptions of eVectiveness and the possibility of blame.

      So the peculiarities of the UK climate suggest that scholarly critiques of risk analysis, their varied forms of constructivism, and their demands for public representation in the risk regulation process,26 Wlter into policy discourses, if at all, in a very uneven way. In part, the practical diYculties and cost of instrumentalizing context and culture for decision making has been a barrier to the transfer of these insights into the policy domain.

      But even where the signiWcance of these matters has been championed, prevailing public management discourses exhibit a preference for rationalism and standardization in making public science accountable. The result is a conception of risk governance heavily framed by rationalized notions of a risk management process. Where the former points to greater external world responsiveness and engagement, the other is more inward-looking and focuses on technical design and coordination issues for control systems.

      These diVerent logics also give rise to cultural variation in the institutional form of risk governance.